Business Model Innovation in the EU and beyond

Business Model Thinking is coming more and more mainstream. On Friday, I was at a workshop sponsored by the EU commission on Business Model Innovation and Policy Making. Here are my takeaways.

Business Model Innovation on the top of the agenda for policy makers

I’m very happy that the topic we started more than 15 years ago will be part of the future innovation policy of the EU. 15 years is a long time for me as a person, but as the business professor Christoph Zott is pointing out in science and policy making 15 years is a short time particularly when you want to introduce new units analysis to understand how firms outperform or create über-returns with (business model) innovation.

Policy making in need for innovation by xkcd

Business Model Innovators as outperformers

While we as entrepreneurs do not care much about measuring the impact of business model innovation on a societal level, the EU or the OECD, that also participated, want to measure each countries performance on business model innovation and then define policies to foster business model innovation on a governmental level.

Most papers presented at the workshop had a strong focus on the technocratic parts of a business model like Value Creation, Value Capture and Value Proposition but were missing the human side to business, the people who run a business, make the difference in innovation but are also the biggest impediments to change.

Pieter Perett and his team from the University of Applied Science Northwestern Switzerland, who organized the workshop, presented their findings that business model innovation make a strong impact on the long-term performance of firms. They use statistical data to identify business model innovators and they try to calculate if there is a über-return for these business model innovators.

Edward Giesen, Head of BMI at IBM, presented their study on business model innovation. They use a different method. Instead of measuring the impact of business model innovation from statistical data, they interview CEOs on the importance of business model innovation, and they see that companies that are consider themselves as business model innovators are outperforming traditional product or process innovators.

Christian Zott, who published one of the first works on business models in 2001 and is a strong advocate for business models, criticized from a scientist point of view the methods to measure the impact of business model innovation. His main point is that business models are often defined too broadly so it is difficult to understand where the real impact was in the business model.

I liked his criticism a lot from a scientist point of view and his focus on rigidity, however his proposal to focus only on the activities might be rigid but then the concept of business models looses its relevancy and its magic to see new boxes, entrepreneurs have never thought of as points of innovation like the revenue model, the value proposition or the Team & Value side of a business.

Where’s the beef?

Hans-Jörg Bullinger, former Head of the German Fraunhofer-Gesellschaft, criticized that the studies are interesting from a scientific point of view, however, they do not help to overcome our technology bias. His call for action was that we need better tools to design business models for entrepreneurs. Of course, I loved his objection, since this is exactly, what we do with the upcoming tool box for entrepreneurs.

Impediments to Business Model Innovation on a firm level

I was invited to talk from a practitioner point of view on the impediments. I presented some ideas on why business model innovation is so difficult to master by the incumbents. I always wonder why I have to talk about the impediments and not about the great advantages of bmi. Last year, I already had to do so in a workshop by the German government and this time it was for the EU Commission. Is it a sign that this happens to me every time I get invited by governments? Anyhow.

My conclusion is that from an incumbent’s point of view many business model innovations are not looking very promising or attractive for the following reasons:

They often have lower gross margins than before, however often with higher a capital turnover, which is typical for business model innovation in retailing.

They cannibalized the current market and its margins.

They contradict the dominate logic of the current business model and particular of the ruling class of managers.

They address new or low-end customers and do not improve performance for the current customers. That’s the typical problem of disruptive innovations.

They are highly risky since there is no market data, no experience and track record you can rely on in your planning process, so large firms have no higher chance to succeed than startups that might not have the resources but are much more open to improvisation and trial & error.

They innovate in areas most companies have never thought as starting point of innovation like the revenue model.

Impediments to overcome on a societal level

We also discussed a societal level what are the impediments to business model innovation and how does Europe compare to the US. One conclusion was that our economic policies are based on protecting more the workplaces of today than creating the ones for the future. Another point is that all EU and most national government foster technological innovation and forget it takes the right business model to bring it to the market. Compared to the US, Europe still does not have a single market e.g. in the music industry. However, it is not only regulation that harms a single market, but also the minds of the people. In America, you address in the beginning immediately around 300 million people when you start an Internet service. And, once you have reached a critical mass, you are on top of the minds of the US. Contrary in Europe, you might be No. 1 in France, you still have no mind share in Germany. You have to conquer the minds of the people of each country and that makes a big difference.

That point was highlighted when Evernote presented their business model. While they had a big user base already in the US, memoic, a competitor from Switzerland, had to conquer every country step-by-step which led them never to the economies of scale you need in the Internet business. And as a Swiss company, you cannot start with the US market first since the Americans cannot believe that cool digital service can come from Europe. However, Skype showed that it possible, but not too many firms managed to overcome the European Mind Barriers.

What to do on a policy level

In the end, we discussed how policy has to change. There, it was interesting how different the participants saw the role of government depending which countries they were coming from. Now, it is up to the policy makers of EU to integrate Business Model Innovation into the innovation agenda. Starting points will be education and project financing not only of technology innovation but also business model innovation.

Thanks to Pieter Perett and his team and the European Commission for organizing and hosting the event.